| 19(1) | File No. 5-8123 |
| Maureen Shea-DesRosierss | |
| (613) 957-8953 |
June 22, 1989
Dear Sirs:
Re: Sale of Accumulated Income in Registered Education Savings Plans ("RESPs")
This is in reply to your letter of May 3 and June 6, 1989 concerning the above-mentioned subject.
You state that nothing prevents a subscriber to an RESP from withdrawing the amounts contributed and then selling the accumulated income to a replacement subscriber who would name a new beneficiary in a position to use the accumulated income as educational assistance payments.
In our view the stipulation in your Prospectus that "Where the subscribers interest a Plan ... is sold by the subscriber to a non-arm's length purchaser" refers to the interest of the subscriber which is his right to receive a refund of his contributions to the Plan and nothing else. It does not include the income generated in the Plan which is to be paid to the beneficiary named in the contract. The subscriber cannot, under any circumstance, sell the accumulated income since it does not belong to him, it belongs to the beneficiary that he has named.
Where a subscriber sells his accumulated income to a replacement subscriber who names a new beneficiary, the transaction is between a subscriber and a replacement subscriber rather than between a subscriber and a promoter as provided in paragraph 146.1(1)(c) of the Income Tax Act (the "Act"). Such a transaction would vest in the new subscriber the former subscriber's right in the contract that has been sold. In our opinion, this would lead to a cancellation by the new subscriber of the right of the beneficiary named by the original subscriber to receive the educational assistance payments and the designation of a different beneficiary under the Plan. Such a sale would negate the purpose for which the plan was originally set up and would not be allowed.
We would however accept a clause in a contract that permits the subscriber to assign, for valuable consideration, his obligations under the contract to another person. There would be no objection to a clause permitting the assignment of a subscriber's right to a refund of payments. Basically, the subscriber has only two rights, the right to a refund of payments as provided for in paragraph 146.1(1)(e) of the Act and the right to designate a beneficiary under the plan as provided for in paragraph 146.1(1)(a) of the Act.
As for your second question in your letter of June 5, the value of the subscribers right to a refund of contributions can never exceed the amount of the contributor's previously unrefunded contributions to the plan and, in consequence, no capital gains can generally arise. Capital losses might arise if the ability of the trust to fully repay the contributions at the time the RESP is terminated is impaired. In our opinion, such a loss would be deemed to be NIL in accordance with subparagraph 40(2)(g)(ii) of the Act.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate